The insurance market is changing. From Brexit to the Insurance Act, there are a host of transformations taking place and the opportunities to expand and grow businesses appear to be being squeezed out as reflected by recent movements – or lack thereof – in mergers and acquisitions across the sector.
After a spate of announcements of large mergers and acquisitions (M&A) in the early part of last year, the number of completed M&A transactions in the insurance industry worldwide has fallen from its three-year high point in the first half of 2015. According to Clyde & Co’s Search for Growth Report, there were 173 deals in the period from October 2015 to March 2016, down from 250 in the previous six months.
While M&A remains one route to growth, insurers and brokers should also be considering alternatives such as establishing businesses in new markets, widening their portfolios and deploying technology solutions, as explained by Andrew Holderness, Global Head of the Corporate Insurance Group, in an exclusive interview with
Insurance Business UK.
“There are many challenges both on the carrier side and the intermediary side,” he said. “From clients I pick up that the rates are soft and there are challenges on the underwriting side to make profits. Indeed there are challenges in the investment market to make any returns of any substance. So that clearly drives people’s behavior going forward as to what they should be doing in a market in which it’s not always clear what events could change the position of being in a soft market.
“So you look to see what costs you can squeeze out of your organisations. That can mean you internally look to see what savings and efficiencies can be made – and then if there is an acquisition the real focus is putting two and two together and squeezing the costs out to create a bigger net profit from the merger. So a big focus is trying to make sure your operating platform is as efficient as possible.
“Then you start to ask yourself: where do you need to go? If you wish to develop your top line and already have efficiencies in your bottom line you probably have a good position in your domestic market. There is stuff you can do there but probably there are more opportunities in the international markets. So we’re finding, typically, that entering new markets is a driver for growth.”
While that’s all well and good for sizeable brokers and insurers, what about those who operate on a smaller business scale? According to Holderness there are opportunities there to be taken if they focus on efficiencies and then look at ways to get ahead of the market.
He said: “You should ask - how do I go about doing my business? This is why you see the growth of some of these facilities that brokers have put together. How do you make what we do today more efficient tomorrow?
“However, while you can focus on efficiencies and what savings you can squeeze out, because so much of the business is driven by relationships, it gets to a point where you realise ‘there’s not a lot more I can do’ because then you’re starting to cut away at the costs that are driving the turnover. Yes all brokers can think they can be more efficient in how they do business from one end of the process right through to the other but depending on where you are in the world that becomes more of a challenge. So you ask yourself: ‘how do I stay relevant?’ Do I stay in my place if I am a niche broker, for example, or do I still feel threatened that if I stay where I am the world is going to overtake me? So that’s when you look at consolidations and buddying up with others in the market to see if that’s a path you should be considering.”
Technology is another serious opportunity for brokers too, according to Holderness. While many brokers may shy away from embracing big data, those that do can capitalise on a significant opportunity.
“We’ve seen in recent years brokers using the data that they hold and offering that as an additional service to their clients,” said Holderness. “For example, ‘this is information we have and we’d like to share with you’, typically for a fee, “and this will hopefully improve the way you underwrite and price risk.’ So that is a more recent path, a new revenue stream – a way of bundling up that know-how and data and sharing that with their clients.
“A broker has multiple sources of data and of course isn’t going to break confidentiality – but from that data it can use that knowledge to provide a better service to individual clients.”
Above all, the message is that market conditions are unlikely to improve in the coming years – and insurers and brokers alike should assess all available opportunities to improve their business.
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